Advice Needed - Profit Protection

[aldem 9]

Hello guys, looking for advice from fellow traders. I bought some AAPL calls before the stock rallied that are now deep in the money. With the market being where it is I am looking for ways to protect the unrealized gains. Of course I could always roll, but I don't want to realize the gains in 2019. I can't think of any setups to lock in the current profit but not hitting the books until 2020. Any suggestions or ideas?

[Kim 7,423]

Selling the stock short maybe? Or selling some calls against the long calls? 

[TooEffingOld 6]

46 minutes ago, aldem said:

Hello guys, looking for advice from fellow traders. I bought some AAPL calls [snip]

Expiration date?

[aldem 9]

March 2020

 

[MaryPaananen 259]

What is the expiration date on the CALLS?   If you're saying you could ROLL, then they probably expire this year . . . and if so, unless you roll them, then I don't know how you can't realize the gains in this year as you'd have to exercise them.  I'm not a tax expert . . .  so don't take my ponderings as gospel by any means!

 

As Kim noted, you could use a couple different methods to hedge - while this may minimize the risk of a downturn, they will all come at a cost if the stock doesn't go down.  Normally if I'm trying to protect unrealized profit - I just go ahead and take some (which locks them in).  If you're trying to keep the upside open - then hedging is probably the best idea (taxes aside)

It seems you're trying to kill two birds with the same stone --- trying to hedge or protect profits as well as push taxes into next year. 

Those two strategies may not exactly align in a manner that gives you the best of both.   

[Yowster 7,974]

You basically want to offset your position by selling something that has a similar delta so that changes to the stock price have the 2 options strikes basically cancelling each other out.   So... assuming there is some time value left in your long strike (I don't know how far DITM it is) you can sell strike near your long strike in the same expiration.   The one thing to look out for (and this is if the long strike is in the money by a huge amount) is to make sure there is some time value left in the short leg so that you won't be exposed to assignment risk.

[TheMachine 2]

Selling a call alone doesn't work well with both protection from a downturn and deferring taxes. If you sell it ATM or OTM, it doesn't protect against a large downturn. If you sell it DITM, then you already realize most of the gains by selling the call (at least that's how it works with the IRS).

 

You could do it with a collar though, just pretend your now-DITM call is a long stock position since its delta is probably close enough to 1. This way you can sell an (A/O)TM call and buy an (A/I)TM put, and realize only the small amount of gain right now in selling the (A/O)TM call, saving and locking in the rest of the gain for next year, regardless of where the stock price ends up. Before you do this, you might want to double check IRS rules on combo orders/multi-leg positions and make sure this is how they will treat the taxes. I'm pretty sure it works since most of their exceptions are to prevent tax "exploits" with straddle-like positions where you leg out of one of the legs (either the winning or losing) depending on whether you want to realize gains or losses this year and hold the other until next year, but you should double check to make sure.

 

(Note that you don't have to sell the call and buy the put with the same strike. You can both sell an OTM call and buy an OTM put, leaving some wiggle room for some potential extra profit/loss if you like.)

Edited November 20, 2019 by TheMachine
ATM -> (A/O)TM and (A/I)TM, add note